When Buying Immediate Annuities, Consider your Age
Immediate Annuity Investment and Age
Buying immediate annuities guarantees income-hungry retirees a lifetime stream of income. Many invest approximately a quarter of their funds in an immediate-fixed annuity. One such approach to immediate annuity investing, one which will guarantee a high income level and makes sense if you expect you will live to a ripe old age, is to make that investment, but not until age 75 or so. This approach will get you a generous income stream based on your shorter life expectancy.
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The Real Impact of Interest Rates on Immediate Annuities
The size of those checks depends not only on your age and gender, but also on current interest rates. Suppose you are a 65-year-old man and you buy an immediate-fixed annuity. A $100,000 investment will give you an annual return of approximately $7,740. If you are a 65-year-old woman, you will get somewhat less, approximately $7,296; reflecting your longer life expectancy. More than anything else, with annuities you are gambling on your own longevity. Ultimately, this has much more bearing on the benefits of this type of investment than does interest rates. If you live a long time, you will collect heaps of income and the annuity could turn out to be an astute investment. If you die soon after purchasing the annuity, you will get precious few monthly checks and your heirs will likely get nothing.
A Strategy to Lessen Interest Rate Impacts on Immediate Annuities
One popular strategy is to wait until your 70's to buy an immediate annuity, so that the payout is driven less by interest rates and more by the insurance company's estimate of how long you might live. There are other advantages to postponing your annuity purchase. By waiting, you will get to see how your health holds up during the initial retirement years. If your health deteriorates a lot, you may decide it isn't such a good idea. The delay will also give you a chance to figure out whether you need the extra income. You may find buying annuities isn't necessary, either because you spend less than you imagine or because you earned higher-than-expected returns during your initial retirement years.
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Don't Delay too Long
One risk of delaying buying annuities can be that in the scramble to cover living expenses, you start to exhaust your retirement savings. If your nest egg becomes too depleted, you'll lose the opportunity to buy an annuity that guarantees a reasonable stream of income. When you need the income, that's the time to invest in it.